How do you withdraw money from your portfolio once you're retired?

How do you withdraw money from your portfolio once you're retired? If you have a portfolio and want to withdraw 4 percent each year, do you just sell enough shares to get the 4 percent and try to gain enough income to build that back up, or am I making this harder than it really is?

For the typical client I would recommend setting up monthly withdrawal. In your case you would take 1/12 of the 4% you wanted to withdraw each year. This allows the money to stay in the account just a little longer and hopefully grow just a bit more.

It also will make it easier to track spending and make sure you are staying on track budget wise.

Most investment companies can make it easy to set this all up to happen automatically.

You should look into the bucket strategy. You divide your funds into a short, middle and long term bucket. The short bucket is money you will need in the next five years and it is invested in very safe securities like cash, CDs and treasuries. The middle bucket is for years 6 - 15 of retirement. It's a little riskier, but still "principle conscious" income paying securities. Some of the middle bucket has a 10+ year time horizon and might include things likefunds that invest in convertibles, preferreds, REITs, and blue chip dividend payers. The "long range" bucket (years 16 - 30 of retirement) is just invested in a passive equity ETF with global exposure. You know that you won't touch it for at least 15 years, so you can ride out any storm in the meantime.

Throughout retirement you shift between buckets. It's fairly complicated in practice but it has a nice psychological effect of putting a time stamp on your investments. There are plenty of good investment advisors that apply this strategy.

You have hit on something that a lot of people do not realize. There is just as much strategy required during the portfolio distribution phase, during retirement, as there was during the accumulation phase. It is best to distribute in the most tax efficient manner, which means your taxes will be minimized and not effectively diminish you money's ability to continue to work for you. A couple examples, then I suggest you work with a fee-only financial advisor to work this out to your best advantage.

If you have investments that are paying dividends, you may have them on an automatic reinvestment program. However, even though they are reinvested, you will still pay taxes on those dividends each year, as per your 1099 at year-end. Better to take those same dividends as part, or all, of your 4% withdrawal, since you are already paying taxes on them, rather than sell something else, to make a withdrawal, and pay taxes on those dollars as well.

Another example: you will likely have holdings that have unrealized losses which could be harvested to offset other gains you may have by selling off shares to make a withdrawal. You may actually strategize to spread minimal capital gains taxes across future years so as to confine yourself to particular tax brackets rather than unnecessarily slip into a higher bracket in any given year.

You may also want to make adjustments to how much cash you maintain in your account(s) so as to provide for a regular schedule of withdrawals to meet your needs, but still liquidate holdings on an investment driven schedule rather than your personal expenses schedule. You do not want to be forced to sell low because the electric bill is due.

Looking forward, we are currently living under the terms of the Tax Cuts and Jobs Act of 2017. Most of the provisions of that act are due to expire in 2025, at which time we will revert back to the prior rules unless the terms of the act are extended, in full or part. As we plan year-to-year, this contingency must be kept in mind so there are no surprises. I wish you the best.

If you look at most well diversified portfolios, models will indicate that distributing around 4% of your portfolio annually will give you a high probablity of the assets lasting for 30 years, if the distribution is around 5% then the probablilty is shortened to about 20 years. Now you have to decide if you want to distribute monthly, quarterly, or annually. With each option the timing of the distribution becomes more important. This is because if your portfolio is invested, its value will change daily and every time you sell you either lock in a gain or a loss. Most investors are going to need money all year long so the way we advise clients to distribute is monthly. We also have clients divide the portfolio into three types of assets. (Cash, Bonds, and Stocks) We would suggest that you start with a 4% distribution rate. In order to cover the distribution rate, you keep a minimum of 5% of the portfolio in cash and distribute from that bucket each month. The remaining 95% of assets should be split between bonds and stocks. If you can target a yield and dividend rate of 2-3%, then that will leave you a gap of about 2-3% to fill with capital appreciation. You can request that all dividends and yield go directly to cash. If you keep fees low and make decisions to sell from bonds or stocks based on the current market conditions, you can manage with relative ease. The key to maintaining the strategy is to make sure your bond and stock mix does not go down too much but still has the opportunity to appreciate engough to keep up with your distributions. The goal should be to build something that will allow you to also increase your distributions to cover inflation. For example, if you have $1M in your portfolio and you are distributing 4%, that is a $40,000 annual distribution for year 1, in year 2, your distribution should go up for inflation, instead of $40,000 it should be $41,200 (3% Inflation). Keeping the percentages of distribution locked to your portfolio amount is difficult assuming that the value of the portfolio is changing daily, so the key is to have flexibility but not to over distribute from your portfolio. If you take too much during a down market, you will not have enough capital for the portfolio to appreciate back to the previous levels. I hope this is helpful, just remember we are just talking about total numbers and not talking about tax impacts. Tax implications are equally important in distributing portfolio assets.

Yes it is fairly straightforward if you have the right focus. You want to make sure you're positioned to maximize your risk-adjusted, after-tax returns. Risk adjusted means you need to ensure your assets are only exposed to enough risk to sustain your goals. After-tax returns are all that matters, so to capture the most bang here you need to make sure you are holding the right type of assets in the right type of accounts. In other words you want to hold capital gain treated assets (i.e. stock funds) in your taxable accounts (i.e., living trust, joint account, individual) and hold ordinary income generating assets (i.e., bonds) in tax deferred accounts. And if you have tax exempt accounts such as Roths you'll generally want to place alternative investments or REITs there.

This sounds complicated but its not. Holding capital assets in taxable accounts let's you harvest losses to offset current portfolio income and minimize future gains (it also allows you to capture a foreign tax credit and step up in basis at death). Holding bonds in tax-deferred accounts defers the income on those bonds. Holding appropriate alternative investments in Roth accounts let's you capture available returns but defer the gains on usually tax in-efficient assets.

Once that structure is in place, start each year with a review of your overall asset allocation - how much you have in stock funds, alternative funds and bonds. What's the appropriate amount in each that will grow your assets enough to best help you sustain your desired lifestyle?

Next identify sources of income that will automatically hit your tax return. Social Security?, Pension?, RMD's, Dividend and Capital Gain distributions from your taxable investment accounts.

Meet any shortfall to fund your lifestyle by first selling stock funds at highest possible cost basis to minimize tax bite. This will be an efficient way for you to get to your desired 4% withdrawal rate. But important to make sure that 4% is sustainable for your circumstances.

Also if you're in the financial position to do so, consider naming a charity as the beneficiary of your IRA or donating the annual RMD to charity so to reduce your taxable income. Its also important to review estate planning documents and overall tax planning efforts to make sure your planning is up to date with current laws.

Good luck and all the best!

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